School expenses may put Michigan near revenue limits for 1995.

CHICAGO -- Michigan's new school funding program will bring the state close to constitutional tax revenue limits in fiscal 1995, state officials said this week.

Preliminary estimates show that the state would be just $75 million to $150 million under limits imposed by the so-called Headlee Amendment to the Michigan Constitution next fiscal year, which begins Oct. 1.

Under the constitution, annual state tax revenue cannot exceed 9.49% of the personal income in the state from the prior calendar year. Preliminary figures released last week by the U.S. Commerce Department placed Michigan's personal income at $193.8 billion for 1993.

That would limit state revenues, aside from revenues for debt service, federal funds, and certain tax credits, to $18.3 billion in fiscal 1995, according to Patrick Anderson, the state's deputy budget director. Michigan's proposed all-funds budget for fiscal 1995 is about $28.3 billion.

A final personal income figure for 1993 is due out in August.

For the current fiscal year, the 1992 personal income number of $185.7 billion means the state is $2.7 billion under the $14.9 billion revenue limit, Anderson said.

Michigan will come closer to the constitutional cap in the next fiscal year because it will spend $6.8 billion on primary and secondary education.

In March, voters approved an increase in the state's sales tax and other state revenue provisions that will allow Michigan to take on the predominant burden of school funding. The vote came in the wake of the legislature's elimination last August of more than $6 billion in school property taxes for operating purposes.

The potential that Michigan will be closer to the revenue limit next fiscal year and in future fiscal years prompted concerns by rating agency officials.

Robert Kurtter, a vice president in state ratings at Moody's Investors Service, said the state will face "a big constraint" on its budget in fiscal 1995, adding that the state's flexibility to deal with unanticipated events will be reduced.

In the longer term, Kurtter said future recessions that could hit Michigan's cyclical economy could increase social spending needs in excess of the limit, while pushing down personal income growth.

"It could force draconian budget cuts," Kurtter said.

Steve Murphy, a director at Standard & Poor's Corp., said it will be important for Michigan's economy to "stay healthy."

"If [the state] needs to raise taxes in the coming years, it will not be able to," he said. "[The state] has about zero flexibility on the revenue raising side."

Claire Cohen, vice chairwoman and senior credit officer of Fitch Investors Service's credit criteria committee, said she is not "overly concerned" about the limit "at this point," adding that final revisions to the 1993 personal income number may change how close the state is to the limit.

Michigan has a general obligation rating of AA with Standard & Poor's and Fitch and A1 with Moody's.

Nick Khouri, Michigan's chief deputy treasurer, said the state will have to "live within its means" as it gets closer to the constitutional limit.

"We'll continue to monitor the situation and pass appropriations within the constitutional limit," Khouri said.

He cited projections that the state will move further away from the limit in future fiscal years. He said Michigan should be $300 million below the limit in fiscal 1996 and $400 million to $500 million below in fiscal 1997.

If the state exceeds the limit by 1% or less, the constitution mandates that funds above the limit be placed in the state's budget stabilization fund.

Khouri said that money can be obtained from the fund if the state's economy hits certain economic triggers, if the state is running a deficit, or if legislation is passed allowing the state to tap into the fund. If the limit is exceeded by more than 1%, the state must rebate all the excess funds to taxpayers. Khouri said 1% would currently equal about $200 million.